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IRS Sets Procedures for Tax Return Preparer Penalties

The
IRS has issued internal memoranda setting forth procedures for
consideration of tax return preparer penalties in taxpayer
examinations. A memorandum by the Large and Mid-Size Business
Division (LMSB) describes procedures for tax return preparer penalty
cases, and two audit technique guideline memos by the Small
Business/Self-Employed Division (SB/SE) explain similar procedures
for excise and employment tax examinations. The memos reflect the
expanded application of the preparer penalties under IRC §§ 6694 and
6695 as amended by the Small Business and Work Opportunity Tax Act
of 2007 (PL 110-28) to other types of tax returns and claims for
refunds besides income taxes. They require examiners to consider the
appropriateness of asserting preparer penalties in all taxpayer
examinations involving a paid tax return preparer and to document
consideration of the issue in the workpapers. They also emphasize
that a potential preparer penalty case is separate from a taxpayer
examination and requires that files for these matters be maintained separately.

In
addition, they prescribe required supervisory approval and
procedures for imposing a preparer penalty and for making referrals
to the IRS Office of Professional Responsibility. The memos can
provide practitioners with useful insights into administrative
guidelines examiners are expected to follow in determining and
imposing penalties and, therefore, best practices practitioners may
follow to avoid incurring penalties.

For
example, in an attachment to the LMSB memo (and in a shorter form in
the SB/SE excise tax memo) the Service suggests questions for
examiners to ask taxpayers in connection with potential preparer
penalties, including:

Are
you aware of any errors, omissions or mistakes on the return
under examination?

Did
you disclose this transaction on your tax return? Why or why not?

Was
there any discussion regarding whether the transaction is
subject to disclosure under Revenue Procedure
94-69?

Were
there any concerns about how the transaction was reported? What
sort of process is used to address those concerns, and on what
basis are decisions made?

Was
there any discussion regarding potential penalties?

These
questions underscore how important it is for preparers to:

Exercise
due diligence in gathering and assembling facts that are
potentially relevant to a return position and in determining
whether section 6694 standards are satisfied. Although a
preparer generally may rely in good faith without verification on
information furnished by the client, the preparer must inquire
further if the information appears inaccurate, inconsistent or
incomplete (Treas. Reg. § 1.6695-2(b)(3)).

Clearly
communicate with the client any concerns about potential
reporting positions. This would include discussions with clients
about the potential taxpayer penalty consequences of a return
position and the opportunity to avoid penalties by disclosure,
where relevant.

Contemporaneously
document discussions with clients in these and other areas.

Practitioners
also should remain alert to the fact that they may be subject to
section 6694 as nonsigning preparers. In addition, tax advice may be
subject to section 6694 standards even if the advice is not subject
to the covered-opinion rules of Circular 230.

When professionals prepare written material for readers inside their organization or outside, they should make sure that no errors distract from the message they need to convey. Take this short quiz for practice in subject-verb agreement.